Q&A with Mark Polatkesen, Director and Senior Broker at Mortgage Domayne
Saving toward your goal
Understanding the ins and outs of mortgage finance can seem daunting, even if you’ve bought property before. We sat down with industry specialist, Mark Polatkesen, Director and Senior Broker with Mortgage Domayne, to get the lowdown on deposits, savings, and the role a broker can play to help you find the best deal for you.
Let’s start with the question of the deposit. How much do you need to have saved before you can make your finance application?
When it comes to the deposit, it does really vary from bank to bank and also your individual situation and circumstances. Generally, if you want the widest possible selection of lenders to consider you, a savings deposit that’s at least 20% of the property price is recommended, especially if you want to avoid the added costs of lenders’ mortgage insurance, which I’ll explain a bit later. A 20% deposit means you borrow the other 80% from the bank and away you go.
There are lenders in the market that can offer a 95% loan, meaning you only need to save a 5% deposit. That percentage can be reduced even further if you have a guarantor who is prepared to put up security to guarantee the loan. Oftentimes we see parents use the equity held in a property they own to help their kids get into their first home sooner, in which case it may be possible to borrow up to 100-105% of the property value. Of course, everyone’s circumstances are different, so this is something you need to explore early, well before you find the property you want to buy.
What’s the difference between genuine savings and gifted money? Do lenders treat them differently?
Banks need to see what they call ‘genuine savings’ to assess your ability to consistently save money over some period of time, say 3-6 months as an example. They like this savings pattern because it shows you have the capacity and discipline to save money on a regular and recurring basis. Some banks can waive that genuine savings requirement if you are a rental tenant, using your rental payment history as a proxy savings pattern. Again, this doesn’t get around having to pay a deposit — you still need that in most cases. It just might not need to be held for a set period if you have been renting. Policies differ from bank to bank so you should seek advice from your mortgage broker or lender first.
You mentioned lenders mortgage insurance earlier. What is it?
Lenders mortgage insurance, or LMI as it is commonly known, is basically an insurance policy for the bank when you borrow more than 80% of the property value. To put it in simple terms it is designed to protect the lender, not you, but you pay for it in a one-off fee that’s added to your loan. On the one hand, LMI means you may get financing up to 95% which could get you into the market sooner. On the other, it is an added cost you need to account for. The amount of LMI you end up paying depends on your deposit size, so talk to your lender or broker for an estimate before you sign loan documents.
What savings tips should people consider when it comes to getting their deposit together?
A good discipline is to regularly print out and review your monthly bank statements, going through each transaction line by line. You are likely to find purchases you can cut back on quite easily. It could be magazine subscriptions or a streaming service you don’t watch or a gym membership you no longer use. Cancelling those really helps. Plus, review and reduce your other discretionary spending as much as you can. That could mean eating out less or putting off that overseas trip. I know it doesn’t sound like fun, but it improves your cash position and shows the bank that you’re a good saver.
One of the advantages of buying land and building a new home off-the-plan is that you’ve got more time to save before you settle. Let’s say you commit to a land contract today with settlement in 12 months; you’ve got another year to further pump up your savings, which will reduce your total borrowings in the long run.
Finally, what’s the role of a broker? What are the main benefits of working with a broker, rather than a lending institution directly?
A mortgage broker is a conduit between you as a loan applicant and the banks or lenders. We’re basically there to assist you to attain a loan. We have the advantage of looking far and wide across 45 different lenders to find you the best deal for your specific goals and circumstances. We aren’t tied to any one bank or lender, so we’re working on your behalf, not theirs, to get the right outcome. We also prepare all the relevant paperwork for you and present that to the lender, and generally streamline the process as much as possible for you.
Securing a mortgage
Welcome to part II of our Ask a Broker series with Mark Polatkesen, Director and Senior Broker with Mortgage Domayne. He gives us the lowdown on finance basics like loan types, interest rates, repayments, and approvals.
What are the common types of loan structures that come into play when buying property?
There are a huge range of lenders and products out there and each lender can package their finance product slightly differently. But to boil it down into simple terms, there are fundamentally two major ways to borrow and pay back mortgage finance: fixed and variable home loans.
Fixed means that the loan comes with an interest rate that is set for a specified period of time, usually between one and three years. This means you have certainty around your repayments over that period, and you can budget accordingly. Variable means the monthly loan repayments fluctuate according to the headline cash rate, which is set by the Reserve Bank. If that rate goes down, you’ll pay back less; if it goes up, you’ll pay back more.
Generally, you can’t make extra payments on a fixed loan, but you can on a more flexible variable loan. You might also get a redraw facility on a variable loan that allows you to access any extra payments you’ve made in case you need that cash for a rainy day.
Do I have to pick one or the other?
No. Many lenders these days will structure a split loan for their customers, with some portion of the loan on a fixed rate and the rest on a variable rate. This is useful if you think that rates might go up at some future point, but you also want to maintain the flexibility of making extra payments to pay some of the loan off faster. The amount to fix versus the amount to make variable is a personal decision that needs to be made based on your own circumstances and goals. Ask a broker or lender to model different scenarios before you sign on the dotted line.
What’s an offset account?
When you take out a loan, some lenders will provide you with a savings account that’s attached to the loan. Any money you hold in that account will go towards offsetting your repayments. For example, let’s say you have a mortgage of $200,000 and you accumulate $10,000 of savings in your offset account. The bank will end up charging you interest on the balance of $190,000. So, having an offset account is a great way to minimise interest and give you a good reason to save extra pennies whenever you can.
What do I need to consider when applying for finance to buying land or build a new home?
The first is that some lenders don’t allow a fixed rate on a construction loan. The reason is because construction loans have what we call progress payments, meaning you need to pay your builder at each of the 5 big stages of construction: base stage, frame stage, lockup, fixing and completion. At each stage, the builder sends a progress invoice which increases your total loan value.
Because of these multiple payments being released, most banks won’t allow you to fix that portion of the loan. The good news is that you can split the loan as mentioned above and borrow the land component on a fixed rate with the construction on the variable rate.
With that said, there are a handful lenders out there that will allow you to fix both the land and construction loans but that is fairly unique. If that’s something you want to investigate, engage with a broker as they’ll be able to point you in the right direction as to which lenders might offer that kind of product.
What kind of repayments can I expect?
That’s a hard question to answer. It’s dependent on how you structure your loan and the interest rates that are prevalent at the time. The following amounts are a rough guide based on say, a 3% interest rate on a 30-year loan term:
- $650,000 loan = $2,740 minimum monthly repayment
- $750,000 loan = $3,162 minimum monthly repayment
- $850,000 loan = $3,583 minimum monthly repayment
Bear in mind that interest rates are dynamic and for the most accurate calculations talk to your broker or bank manager for the most up to date numbers based on your personal situation.
What are pre-approvals, when should I get one, and how are they different from formal approvals?
When there isn’t a property involved yet, but you want some certainty to go out and make an offer, the banks can provide a pre-approval. Basically, they assess your savings, documentation, and application and issue an approval subject to certain conditions being met. How long a pre-approval is valid for can differ from bank to bank, but common timeframe is three to six months.
It’s worth noting that this can impact land purchases if the title date, and therefore settlement, is greater than six months. It’s always good to speak to a broker that’s actively working in the home and land space, because they’ll keep an eye on things. If there are changing circumstances at play, they can pinpoint that upfront and make sure that they’ve got a plan prior to the settlement taking place so that you’re not delayed in any way.
A formal approval is pretty much as it sounds. Once the bank is completely satisfied with your application, vetted your land and building contracts, and conducted a valuation they’ll issue you, as the borrower, a letter of offer that outlines that they agree to lend you the money on a certain list of terms, allowing you to get on with buying the property you want.
Valuations & Stamp Duty
Welcome to part III of our Ask a Broker series with Mark Polatkesen, Director and Senior Broker with Mortgage Domayne. In our final instalment of this series, Mark takes us through what you need to know about valuations, stamp duty, and land tax.
Why do I need a valuation for my property purchase?
When a lender provides you finance to buy a property, the property itself becomes the security for the loan. If you were to default on your mortgage repayments, the bank has the right to sell the property to make back its money, and that’s where the importance of valuations come in. Essentially, the lender needs to know that the value of the property covers their loan cost.
In the case of house and land contracts, it’s important to understand that your lender will order two different valuations, one on the land and one on the build. Together they will add up to a completed valuation. Valuers do this by looking at comparable property sales over a recent six-month period, where comparable means similar size land, similar build, and similar location.
What do I do if the valuation comes in lower than I expected?
I’ve seen some pretty big fluctuations in valuations in my time. And one of the benefits of going with a broker, is that we aren’t stuck using the one valuer preferred by your bank. We can go to different valuers at different lenders to make sure we get a full picture and advise you on the best solution for you. A good way to ensure your valuation stays within a comparable range is to ensure you’re not over capitalising on upgrades that would be hard to recoup if you had to sell the house.
What is stamp duty and do I have to pay it?
Stamp duty is a levy imposed by the State Government and collected by the State Revenue Office that occurs every time a property is sold. The exact amount of stamp duty is calculated based on the property’s dutiable value, how you use the property (for example, principal place of residents or investment), and whether you are eligible for any concessions or exemptions. In Victoria, there are a range of concessions and exemptions for first home buyers, so this is something to ask your mortgage broker about when you’re compiling your loan application.
Finally, what is land tax and how do I work out if I owe it?
Land tax is not something your lender or broker has much to do with and we normally point people in the direction of the State Revenue Office to discuss this. Land tax is only applicable on certain types of land, including vacant land for future residential purposes, so we encourage people to ring up the revenue office directly to understand how the rules apply to them specifically, because it does vary quite a lot.
